Cost of living adjustments (COLAs) are meant to help ensure that Social Security benefits keep up with inflation. However, several factors can affect how well COLAs actually achieve this goal. One issue is the way that inflation is measured. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the most commonly used measure of inflation. Still, it may not accurately reflect the cost of living for seniors. This is because the CPI-W focuses on items typically purchased by urban workers, such as transportation and childcare expenses.
On the other hand, senior citizens tend to spend a more significant proportion of their income on housing and healthcare costs, which may not be well represented in the CPI-W. In addition, the CPI-W does not consider changes in lifestyle or spending patterns that may occur as people age. As a result, COLAs may not accurately reflect seniors’ actual cost of living. Another factor that can affect COLAs is timing. Social Security benefits are typically paid out in December after the CPI-W for November has been released. However, December is usually a relatively low month for inflation, so the COLA for the following year may be lower than it might have been if it had been based on earlier data. This can create a ‘lag’ effect, where benefits don’t keep up with inflation in the months immediately following a benefit payment. Finally, a ‘compression’ effect can also occur when benefit payments fail to keep pace with inflation over time. This can cause senior citizens to experience a lower standard of living, even if their benefits are nominally increasing each year. For all these reasons, it’s essential to understand that COLAs are not always an accurate reflection of changes in the cost of living.
So what does this mean for retirement planning, and what can a financial planner do to help?
As you approach retirement, you may be wondering how you’re going to make ends meet. Social security benefits may not be enough to cover all your expenses, so it’s important to start planning for your financial future as early as possible.
One way to do this is by working with a financial planner. A good financial planner can help you create a retirement plan that fits your unique needs and goals. They can also help you manage your money so that you’re prepared for whatever life throws your way.
If you’re not sure where to start, or if you have questions about retirement planning, consider talking to a financial planner today. They can help you get on track for a secure financial future.